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    • Journal of Economics and Sustainable Development www.iiste.orgISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)Vol.3, No.7, 2012 Monetary Policy and Economic Growth of Nigeria Charles Onyeiwu University of Lagos, Lagos State, Nigeria Email: chasonyeiwu@yahoo.comAbstractThis paper examines the impact of monetary policy on the Nigerian economy. In doing this, the Ordinary LeastSquares Method (OLS) is used to analyse data between 1981 and 2008. The result of the analysis shows thatmonetary policy presented by money supply exerts a positive impact on GDP growth and Balance of Paymentbut negative impact on rate of inflation.The recommendations are that monetary policy should facilitate a favourable investment climate throughappropriate interest rates, exchange rate and liquidity management mechanism and the money market shouldprovide more financial instruments that satisfy the requirement of the ever-growing sophistication of operators.Keywords: Monetary policy, economic growth, transmission mechanism and liquidity.1.IntroductionMonetary policy as a technique of economic management to bring about Sustainable economic growth anddevelopment has been the pursuit of nations and formal articulation of how money affects economic aggregatesdates back the time of Adams Smith and later championed by the monetary economists. Since the expositions ofthe role of monetary policy in influencing macroeconomic objectives like economic growth, price stability,equilibrium in balance of payments and host of other objectives, monetary authorities are saddled theresponsibility of using monetary policy to grow their economies. In Nigeria, monetary policy has been usedsince the Central bank of Nigeria was saddled the responsibility of formulating and implementing monetarypolicy by Central bank Act of 1958. This role has facilitated the emergence of active money market wheretreasury bills, a financial instrument used for open market operations and raising debt for government has grownin volume and value becoming a prominent earning asset for investors and source of balancing liquidity in themarket. There have been various regimes of monetary policy in Nigeria some times, monetary policy is tight andat other times it is loose mostly used to stabilize prices. The economy has also witnessed times of expansion andcontraction but evidently, the reported growth has not been a sustainable one as there is evidence of growingpoverty among the populace. The question is, could the period of growth be attributed to appropriate monetarypolicy? And could the periods of economic down turn be blamed on factors other than monetary policyineffectiveness? What measures are to be considered if monetary policy would be effective in bringing aboutsustainable economic growth and development?. These are the Questions this study would attempt to answer.The objective of this study therefore, is to assess the impact of monetary policy in Nigeria, specifically, if it hasfacilitate growth or not and examine the effect of other co-operant factors in bringing about the desiredsustainable economic development in Nigeria. For this purpose, the paper is divided into four sections. The firstsection is the introduction, the second section is the theoretical framework and Literature Review, the thirdsection is the methodology, the fourth section discusses the result of the study and the fifth section concludes thework.2. Theoretical Framework And Literature ReviewMonetary policy got its root from the works of Irving fisher (see Diamond, 2003. P. 49) who lay the foundationof the quantity theory of money through his equation of exchange. In his proposition money has no effect oneconomic aggregates but price. However, the role of money in an economy got further elucidation from (Keynes,1930 P. 90) and other Cambridge economists who proposed that money has indirect effect on other economicvariables by influencing the interest rate which affects investment and cash holding of economic agents. Theposition of Keynes is that unemployment arises from inadequate aggregate demand which can be increased byincrease in money supply which generates increase spending, increase employment and economic growth.However, he recommends a proper blend of monetary and fiscal policies as at some occasions, monetary policycould fail to achieve its objective. The role of monetary policy which is of course influencing the volume, costand direction of money supply was effectively conversed by (Friedman, 1968. P. 1-17), whose position is thatinflation is always and everywhere a monetary phenomenon while recognising in the short run that increase inmoney supply can reduce unemployment but can also create inflation and so the monetary authorities shouldincrease money supply with caution. 62
    • Journal of Economics and Sustainable Development www.iiste.orgISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)Vol.3, No.7, 20122.1 Monetary Policy Transition MechanismThere are different transmission channels through which monetary policy affects economic activities and thesechannels of transmissions have been broadly examined under the monetarist and Keynesian schools of thought.The monetarist postulates that change in the money supply leads directly to a change in the real magnitude ofmoney. Describing this transmission mechanism, (Friedman and Schwartz. 1963) say an expansive open marketoperations by the Central Bank, increases stock of money, which also leads to an increase in Commercial Bankreserves and ability to create credit and hence increase money supply through the multiplier effect. In order toreduce the quantity of money in their portfolios, the bank and non-bank organisations purchase securities withcharacteristics of the type sold by the Central Bank, thus stimulating activities in the real sector. This view issupported by (Tobin, 1978) who examines transmission effect in terms of assets portfolio choice in thatmonetary policy triggers asset switching between equity, bonds, commercial paper and bank deposits. He saysthat tight monetary policy affects liquidity and banks ability to lend which therefore restricts loan to primeborrowers and business firms to the exclusion of mortgages and consumption spending thereby contractingeffective demand and investment.Conversely, the Keynesians posit that change in money stock facilitates activities in the financial marketaffecting interest rate, investment, output and employment. (Modigliani, 1963) supports this view but introducedthe concept of capital rationing and said willingness of banks to lend affects monetary policy transmission. Intheir analysis of use of bank and non bank funds in response to tight monetary policy (Oliner and Rudebush,1995) observe that there is no significant change in the use of either but rather larger firms crowd out small firmsin such times and in like manner (Gertler and Gilchrist, 1991) supports the view that small businesses experiencedecline in loan facilities during tight monetary policy and they are affected more adversely by changes in bankrelated aggregates like broad money supply.. Further investigation by (Borio, 1995) who investigated thestructure of credit to non government borrowers in fourteen industrialised countries observe that it has beeninfluenced by factors such as terms of loan as interest rates, collateral requirement and willingness to lend. 2.2Nigeria’s ExperienceThe primary goal of monetary policy in Nigeria has been the maintenance of domestic price and exchange ratestability since it is critical for the attainment of sustainable economic growth and external sector viability(Sanusi, 2002. P. 1)(Adefeso and Mobolaji, 2010) employed Jahansen maximum likelihood co-integration procedure to show thatthere is a long run relationship between economic growth, degree of openness, government expenditure and M2.(Ajisafe and Folunso, 2002) observe that that monetary policy exerts significant impact on economic activity inNigeria.(Kogar 1995) examinee the relationship between financial innovations and monetary control and concludes thatin a changing financial structure, Central Banks cannot realize efficient monetary policy without setting newprocedures and instruments in the long-run, because profit seeking financial institutions change or create newinstruments in order to evade regulations or respond to the economic conditions in the economy. Examining theevolution of monetary policy in Nigeria in the past four decades, (Nnanna, 2001, P. 11) observe that though, theMonetary management in Nigeria has been relatively more successful during the period of financial sectorreform which is characterized by the use of indirect rather than direct monetary policy tools yet, the effectivenessof monetary policy has been undermined by the effects of fiscal dominance, political interference and the legalenvironment in which the Central Bank operates. (Busari et-al 2002) state that monetary policy stabilizes theeconomy better under a flexible exchange rate system than a fixed exchange rate system and it stimulates growthbetter under a flexible rate regime but is accompanied by severe depreciation, which could destabilize theeconomy meaning that monetary policy would better stabilize the economy if it is used to target inflation directlythan be used to directly stimulate growth. They advised that other policy measures and instruments are needed tocomplement monetary policy in macroeconomic stabilization. In the same stride, (Batini, 2004, P.32 and 35)stress that in the 1980s and 1990s monetary policy was often constrained by fiscal indiscipline. Monetarypolicies financed large fiscal deficit which averaged 5.6 percent of annual GDP and though the situationmoderated in the later part of the 1990s it was short lived as Batini, described the monetary policy subsequentlyas too loose which resulted to poor inflation and exchange rates record. (Folawewo and Osinubi, 2006)investigates how monetary policy objective of controlling inflation rate and intervention in the financing of fiscaldeficits affect the variability of inflation and real exchange rate. The analysis is done using a rational expectationframework that incorporates the fiscal role of exchange rate. The paper reflects that the effort of the monetaryauthority to influence the finance of government fiscal deficit through the determination of the inflation-tax rateaffects both the rate of inflation and the real exchange rate, thereby causing volatility in their rates. The paper 63
    • Journal of Economics and Sustainable Development www.iiste.orgISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)Vol.3, No.7, 2012reveals that inflation affects volatility of its own rate as well as the rate of real exchange. The policy implicationof the paper is that monetary policy should be set in such a way that the objective it is to achieve is well defined.(Sanusi 2002, p. 18) says that the ability of the CBN to pursue an effective monetary policy in a globalised andrapidly integrated financial market environment depends on several factors which include, instituting appropriatelegal framework, institutional structure and conducive political environment which allows the Bank to operatewith reference to exercising its instrument and operational autonomy in decision- making, the degree ofcoordination between monetary and fiscal policies to ensure consistency and complementarity, the overallmacroeconomic environment, including the stage of development, depth and stability of the financial markets aswell as the efficiency of the payments and settlement systems, the level and adequacy of information andcommunication facilities and the availability of consistent, adequate, reliable, high quality and timelyinformation to Central Bank of Nigeria. 3. Research MethodologyThis research is designed to critically appraise the monetary policy in Nigeria in the light of macroeconomicperformance of the country.The Ordinary Least Square (OLS) i.e. regression a nalysis method is used to analyse the data that are collectedfrom Central Bank of Nigeria and National Bureau of Statistics publications for various years covering 1981 to2008.In demonstrating the application of the Ordinary Least Square method, three multiple regression models is usedwith the liquidity ratio, money supply, cash ratio as the independent variables in all the models while grossdomestic product, inflation rate and balance of payment would be the dependent variables in model one, modeltwo and model three respectively.3.1Model SpecificationThe three models to capture the impact of monetary policy on Nigerian macroeconomic variables are statedbelow with the independent variables as liquidity ratio, money supply and cash ratio while the dependentvariables will be gross domestic product, inflation rate and balance of payment total; so that:Model 1 gdp = a0 + a1lr + a2M2 + a3Cr + Ui (1)Where gdp - Gross Domestic Product Lr - Liquidity ratio M2 - Broad Money Supply Cr - Cash ratio a0, a1, a2 and a3 - Parameters Ui - Error termModel II inf = b0 + b1lr + b2M2 + b3Cr + Ui (2)Where inf - Inflation rate Lr - Liquidity Ratio M2 - Broad Money Supply Cr - Cash ratio b0, b1, b2 and b3 - Parameters Ui - Error termModel III bop = c0 + c1lr + c2M2 + c3Cr + Ui (3)Where bop - Balance of Payment lr - Liquidity Ratio M2 - Broad Money Supply Cr - Cash ratio c0, c1, c2 and c3 - Parameters Ui - Error term 64
    • Journal of Economics and Sustainable Development www.iiste.orgISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)Vol.3, No.7, 20124.Empirical ResultThis section presents results of empirical analyses of the study. Unit root is first conducted, then followed byregression, Johansen co-integration result and lastly vector error correction model (VECM). In this section, wepresent the empirical results on the effects of monetary policy on the Nigerian economy. In order to determinewhether the macro variables are stationary or otherwise, unit root tests are conducted if non-stationary at levels,we then go ahead to determine the order of integration. Next a test of co-integration is carried out betweeneconomic growth (GDP), inflation rate (INFLR), balance of payment (BOP), and the other various subset ofmonetary policy variables. Test for the stationary of the variables are presented in table 1 below.The test results suggest that the null hypothesis of unit root for the six time series namely, liquidity ratio (LR)cash ratio,(CASHR), money supply(MS2), gross domestic product (GDP), inflation rate (INFLR) and balance ofpayment (BOP) cannot be rejected at levels. This prompted us to test the Augmented Dickey-Fuller (ADF) test atfirst levels. The result as shown in table1 suggests that the null hypothesis of the variables can be rejected in thefirst difference. These shows that some of the variables are stationary at first difference and are integrated oforder one or are 1(1) series while someare stationary at order 2.Table 1: Unit Root ResultVariable DF ADF Test ADF Test P-values Order of ADF critical value Statistics Integration lags∆ GDP (c) 5% -2.9850 3.622099 0.0015 I (1) 1 10% -2.6318∆INFLR 5% -2.9798 -2.934405 0.0075 I (1) 1(c ) 10% -2.6290∆BOP (c ) 1% -3.7343 -4.529425 0.0002 I (2) 1 5% -2.9907∆LQR (I) 5% -2.9850 -2.94227 0.0075 I (1) 1 10% -2.6318∆CASHR (I) 5% -3.6219 -4.252270 0.0004 I (1) 1 10% -3.2474∆ MS2 (I) 1% -3.7497 -4.229205 0.0004 I (3) 1 5% -2.9969Source; Author’s estimation using E-view 3.0For the ADF statistics, the 99%, 95%, and 90% critical values are shown after each T-statistics at the left handside of second column of table 1. The result in table 1 above shows that none of the variables were stationary atlevels. This can be seen by comparing the observed values (in absolute terms) of the ADF test statistics at 1%,5% and 10% levels of significance. The result provides some evidence that non- of the variables were stationarywhen differenced at levels, hence there is evidence of non-stationary. However, differencing once inducedstationary in four (GDP, INFLR, CASHR and LQR) while balance of payment (BOP) and money supply (MS2)were differenced twice to attain stationary. Therefore, the null hypothesis is accepted for non-stationary for thevariables at levels and it is sufficient to conclude that there is a presence of unit root at levels. As a result all thevariables were differenced and others were differenced twice and the ADF tests were conducted on them; theresult is shown in table 1 above. 65
    • Journal of Economics and Sustainable Development www.iiste.orgISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)Vol.3, No.7, 2012This reveals that some of the variables were stationary at first difference and some were at second difference. Onthese bases, the null hypothesis of non-stationary is rejected for all the variables and we therefore, conclude thevariables are stationary. This further implies that the variables are integrated of order one, I (1) and two I (2).Test Result for Co integrationAfter forming the stationary of the variables, we proceed to test for the co integration among the variables. Whenco integration is present, it means that economic growth, inflation rate, balance of payment and money supplyshare a common trend and long-run equilibrium as suggested in theory. We started the co integration analysis byemploying the Johansen and Juselius multivariate co integration test. The maximum Eigen value statisticsindicated (6) co integrating vectors at the 5 percent level of significance, suggesting that there is co integrationrelation between monetary police and the different measures of macro economic stability.Table1c Co-Integration TestSample: 1981 2007Included observations: 28 Test assumption: Linear deterministictrend in the dataSeries: GDP INFLR BOP LQR CASHR MSLags interval: 1 to 1 Likelihood 5 Percent 1 Percent Hypothesized Eigenvalue Ratio Critical Value Critical Value No. of CE(s) 0.935594 213.3558 94.15 103.18 None ** 0.899440 144.7921 68.52 76.07 At most 1 ** 0.836302 87.36713 47.21 54.46 At most 2 **4.1 Presentation And interpretation Of Regression ResultIn this study, mathematical relationships between the variables are established. Available data on liquidity ratio(LR), cash ratio (CASHR), money supply (MS2), gross domestic product,(GDP), inflation rate (INFLR) andbalance of payment (BOP) were collected and used for the purpose of this analysis. Three multiple regressionmodels were formed to capture the assumed relationship between these variables.Table2. Presentation of Model 1 Result (GDP)Variable Coefficient Std. Error t-statistic Prob.C -105615.6 1116194.0 -0.094621 0.9254LQR 471.2586 23756.76 0.019837 0.9843CASHR 38075.83 66199.74 0.575166 0.5708MS2 4.295952 0.157122 27.34147 0.0000Source; Author’s estimation using E-view 3.0R2 =0.971739 F (3, 27) = 263.6123 Adj.R2 = 0.968053 DW=1.382416 Model EstimationGDP = -105615.6 + 471.259 log (LQR) + 38075.8 log (CASHR) + 4.296 log (MS2)t = (-0.095) (0.020) (0.575) (27.34)Where the variables remain as previously defined. The above table is the result of the static regression analysiswhere Gross Domestic (GDP) was regressed on liquidity ratio (LQR)., Cash ratio (CASHR) and money supply(MS2). The a priori expectation of the estimate co efficient is; α0 >0, α1 > 0, α2 >0, α3 >0.Analysis of Result 1 66
    • Journal of Economics and Sustainable Development www.iiste.orgISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)Vol.3, No.7, 2012Considering the uncertain quality of data used in the study, the level of statistical significance chosen for testingthe hypothesis is at 5% level. The regression result shows there is an existence of a linear and proportionaterelationship between GDP and the explanatory variables. The explanatory variables identified are the monetarypolicy variables of liquidity ratio, cash reserve and broad money supply. The sign of the co-efficient estimatesare rightly assigned, reflecting a positive relationship with economic growth and thus confirms to priorexpectation. The statistical evidence emanating from the study of co-efficient of determination R2 shows that theendogenous variables jointly explained over 97.2% of the total variation in the dependent variable (GDP). Thevalue of the adjusted R2 (0.96805) which is over 96.8 % re-affirms the goodness of fit and signifies that over97.2% variations did not merely result from the use of multiple variables in the model. The F-statistics (263.6) ofthe model estimate is statistically satisfactory such that the hypothesis of the equation being equal to zero can berejected. The joint influence of the explanatory variables was statistically significant at 5 percent level ofsignificant. Durbin Watson test of autocorrelation (1.38) indicates the presence of positive autocorrelation.Specifically, at 5% level of significance liquidity ratio and cash reserve have direct and although insignificantpositive impact on growth except for money supply which exerts a significant positive impact on growth. Inother words liquidity ratio and cash reserve were statistically insignificant and thus have no significant impact ongrowth and development while money supply has a significant relation with economic growth in Nigeria. Thisconfirms the hypothesis that monetary policy (money supply) has a significant impact on Nigeria economicgrowth within the period under review.The empirical evidence emanating from the study reveals that money supply had a direct relationship witheconomic growth which suggests that it encourages investment and productivity in goods and services. Liquidityratio and cash reserve had positive but insignificant relation with growth hence, little reliance can be built on theresult. This can be viewed that the expected transformations of the economy through the monetary instrument ofliquidity ratio and cash reserve policies for the periods covered are not being realized.Table 3.Model II Result (Inflation)Variable Coefficient Std. Error t-statistic Prob.C 5388053 18.24943 2.952450 0.0071LQR -0.561754 0.388416 -1.446270 0.1616CASHR -0.0000298 0.0000257 -1.159593 0.2581MS2 0.357663 1.082345 -0.330451 0.7441Source; Author’s estimation using E-view 3.0R2 = 0.17622 F, (3, 27) = 1.646024 DW = 1.028958 Adj. R2 = 0.068770 Model Estimation INFRL= 53.88053- 0.561754(LQR) – 0.357663 (CASHR) -0.0000298 (MS2) t = (2.952) (-1.446270) (-0.330451) (-1.159593)Where the variables remain as previously defined. The above table is the result of the static regression analysiswhere inflation rate (INFLR) was regressed on liquidity ratio (LQR), Cash ratio (CASHR) and money supply(MS2). The a priori expectation of the estimate co efficient is; α1 < 0, α2 < 0, α3 < 0. Analysis Of Result 2The overall statistical significance of the estimated equation is non-satisfactory (F* = 1.65), such that the jointinfluence of the endogenous variables were also low (R2 = 0.176), meaning that over 17.6 % variations ininflation rate is being jointly explained by changes in monetary policy. This also reveals that monetary policyalone cannot effectively capture inflation control in Nigeria in the absence of other macro variables, such asinvestment and government expenditure. The result of the study further reveals the presence of positiveautocorrelations.The macro economic variable (inflation) had indirect relationship with monetary policy, thus conforms to apriori expectations. This suggest that monetary polices discourages inflation in the economy. The study furtherreveals that a unit increase in monetary policy regulation reduces inflation in Nigeria although not significant.For instance a unit increase in commercial banks liquidity ratio and cash reserve helps to reduce inflation by acorresponding unit of 1.44 and 0.357 respectively. The tendency of excess liquidity in circulation thatencourages inflation in the macro economic environment is minimized. Also we could further adduce that stablemacro economic environment is necessary for effective monetary policy and economic growth. 67
    • Journal of Economics and Sustainable Development www.iiste.orgISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)Vol.3, No.7, 2012Table 4.Model III; (Balance of Payment)Table4. Presents the summary of the regression result of monetary policy and Balance of payment as thedependent variableTable 4: Model III: Balance of paymentVariable Coefficient Std. Error t-statistic Prob.C -102969.6 637728.8 -0.161463 0.873LQR 2257.852 13573.25 0.166346 0.8693MS2 0.652736 0.089771 7.271160 0.0000CASHR -15777.85 37822.72 -0.417153 0.6804Source; Author’s estimation using E-view 3.0R2 = 0.707681 F, (3, 27) = 18.56037 DW = 1.533354 Adj. R2 = 0.669552 Model EstimationBOP = -102969.6 + 2257.85 (LQR) + 0.652736 (MS2) -15777.85 (CASHR)t = (-0.161) (0.166346) (7.271160) (-0.417153)The table above is the result of the regression analysis where Balance of Payment (BOP) was regressed onliquidity ratio (LQR), Cash ratio (CASHR) and money supply (MS2). The a priori expectation of the estimate coefficient is; α1 > 0, α2 >0, α3 > 0. Analysis of Result 3 Here the result of R2 from the empirical study indicates that over 70.8 % the variation in balance of paymentwere jointly captured by the independent variables (monetary polices). This is also re-affirmed by the adjustedR2 result (0.669), explaining over 66.9 % of the variations in balance of payment. The entire model is alsostatistically significant (F* = 18.56) while the Durbin Watson statistics reveals little or no autocorrelation of thevariables. Of the components of monetary policy entered, liquidity ratio and money supply show a directrelationship with balance of payment except for cash ratio. The empirical evidence from the study reveals thatmoney supply is significantly and positively related to balance of payment. This therefore, suggests the vitalimportance of money supply in achieving a favorable balance of payment in foreign exchange transactions. Theresult further reveals an indirect relation of cash reserve and balance of payment. The suggested plausible reasonfor this observation could be the negative effect of tight monetary policy in resource mobilization, productionand export, resulting to distortion in the balance of payment equilibrium. The direct but insignificant effect ofliquidity ratio could be seen as its relative small contribution to balance of payment transactions and theeconomy in general. It also suggests an uncomplimentary monetary policy that is not trade enhancing.5. Summary, Conclusions and RecommendationsSummarythis research work studied the effect of Central Bank of Nigeria’s (CBN) monetary policies on selectedmacroeconomic variables – gross domestic product, inflation rate and balance of payment between 1981 and2008.An empirical investigation of the effectiveness of Central Bank of Nigeria’s monetary policies was conductedand the major findings of the study are summarised below:i. It was found that overall, CBN’s monetary policies play crucial role in influencing the level of productivity in the country. This result gives weight to the place of Central bank in the national development process of a nation;ii. The regression analysis also revealed that the adoption of various monetary policy measures by the Central Bank of Nigeria has no significant impact on the inflationrate in the country. This suggests that the problem of inflation in Nigeria is not a monetary phenomenon but israther attributable to the structural rigidity in the country. This is understandably as Nigeria is operating farbelow full employment equilibrium and the increase in GDP does not translate to improved purchasing powerbecause poverty index has continued to worsen over the years. A lot still needs to be done in the areas ofcreating public awareness, improving operations of the financial market, enhancing the depth and breadth of themarket and building regulatory capacity so as to appropriately position the market to face the challenges ahead. iiiThe empirical analysis also reveal that liquidity and cash ratios do not have significant impact on the balance of payment position which means that the monetary policy has not supported healthy exchange rate system that would encourage export and discourage frivolous importation 68
    • Journal of Economics and Sustainable Development www.iiste.orgISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)Vol.3, No.7, 2012 5.2ConclusionThe role of the Central bank in regulating the liquidity of the economy which affects some macroeconomicvariables such as the output, employment and prices cannot be over-emphasised. The Central Bank of Nigeriaover the years has adopted different monetary policy management techniques to keep the economy in a stablestate. Before the structural adjustment of 1986 which ushered in a period of financial deregulation, it adopted asystem of direct control through the issue of credit guidelines and interest rate fixation but from the later part ofthe 1980s, it adopted indirect control system of management by resorting to open market operations, adjustmentof legal reserves requirement and the rediscount rate. But in all these, the attainment of the desired objectives ofmonetary policy has been affected by domestic and external environments which include fiscal dominance,underdeveloped nature of the financial markets, external debt overhang and volatility in oil price, Sanusi (2002)5.3RecommendationsBased on the findings made in the course of this study, particularly the results of the regression models, it is clearthat the development of the Nigerian economy is highly dependent on the provision of the right environment forinvestment, which will in no doubt encourage economic growth and development. The followingrecommendations are hereby made:(1) Monetary policies should be used to create a favourable investment climate by facilitating the emergency ofmarket based interest rate and exchange rate regimes that attract both domestic and foreign investments, createjobs, promote non oil export and revive industries that are currently operation far below installed capacity. Inorder to strengthen the financial sector, the Central Bank has to encourage the introduction of more financialinstruments that are flexible enough to meet the risk preferences and sophistication of operators in the financialsector.(2)The government should also endeavour to make the financial sector less volatile and more viable as it is indeveloped countries. This will allow for smooth execution of the Central Bank monetary policies. Law relatingto the operation of the financial institutions could be made a bit less stringent and more favourable for theoperators to have room to operate more freely.(3)The Central Bank should find a way of reducing the level of deficit financing, improve funding of theinformal sector and the SMEs and promote their integration into the formal sector while at the same timeworking with government to improve the tax regime to make the tax capacity to approach the tax potential so asto reduce tax evasion to barest minimum and ensure that there is proper balancing between capital and recurrentexpenditures of government.ReferencesAdefeso, H. and Mobolaji, H. (2010) ‘The fiscal- monetary policy and economic growth in Nigeria: furtherempirical evidence’, Pakistan Journal of Social Sciences, Vol. 7(2) Pp 142Batini, N. (2004) ‘Achieving and maintaining price stability in Nigeria’. IMF Working Paper WP/04/97, June.Borio, C. (1995) ‘The structure of credit to the non-government sector and the transmission mechanism ofmonetary policy: A Cross-Country Comparison,’ Bank for International Settlement Working Paper, Basle, April.Busari,D., Omoke, P and Adesoye, B. (2002) ‘Monetary policy and macroeconomic stabilization underAlternative exchange rate regime: evidence from Nigeria’.Diamond, R. (2003) Irving Fisher on the international transmission of boom and depression through moneystandard: Journal of Money, Credit and Banking, Vol. 35 Pp 49 online editionFolawewo, A and Osinubi, T. (2006) ‘Monetary policy and macroeconomic instability in Nigeria: A RationalExpectation Approach’. Journal of Social Science, vol.12(2): pp.93-100.Friedman, Milton. (1968) ‘ The role of monetary policy, American Economic Review, Vol. 58, No 1.Pp 1-17Friedman, M and Schwartz, A. (1963) ‘Money and business cycles’ Review of Economics and Statistics,February, pp. 32-64.Gertler, M and Gilchrist, S. (1991) ‘Monetary policy, business cycles and the behaviour of small manufacturingfirms’ WP 3892, National Bureau of Economic Research, Cambridge, November.Keynes, J. (1930) ‘Treatise on money’ London, Macmillian. P. 90Kogar, C. (1995) ‘Financial innovations and monetary control’ The Central Bank of The Republic of TurkeyDiscussion Paper No: 9515, May. 69
    • Journal of Economics and Sustainable Development www.iiste.orgISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)Vol.3, No.7, 2012 Modigliani, F. (1963) ‘The monetary mechanism and its interaction with real phenomena’, Review ofEconomics and Statistics, Supplement, February, pp. 79-107Nnanna, O. (2001) ‘The monetary policy framework in Africa: The Nigerian experience. Extracted fromwww2.resbank.co.za/internet/publication..../Nigeria.pdf. Pp 11 Oliner,S and Rudebusch, G. (1995) ‘Is there a bank lending channel for monetary policy?’ Economic Review,Federal Reserve Bank of San Francisco, No. 2 pp.3-20. Sanusi, J. (2002) ‘Central Bank and the macroeconomic environment in Nigeria’. Being a Lecture delivered toparticipants of the senior executive course No. 24 of the national Institute for policy and strategic studies(NIPSS), Kuru on 19 th august. Tobin, J. (1978) ‘Aproposal for international monetary reform’ Easter Economic Journal, Easter EconomicAssociation, Vol. 4(3) Page 153-159. 70
    • This academic article was published by The International Institute for Science,Technology and Education (IISTE). The IISTE is a pioneer in the Open AccessPublishing service based in the U.S. and Europe. The aim of the institute isAccelerating Global Knowledge Sharing.More information about the publisher can be found in the IISTE’s homepage:http://www.iiste.orgThe IISTE is currently hosting more than 30 peer-reviewed academic journals andcollaborating with academic institutions around the world. Prospective authors ofIISTE journals can find the submission instruction on the following page:http://www.iiste.org/Journals/The IISTE editorial team promises to the review and publish all the qualifiedsubmissions in a fast manner. All the journals articles are available online to thereaders all over the world without financial, legal, or technical barriers other thanthose inseparable from gaining access to the internet itself. Printed version of thejournals is also available upon request of readers and authors.IISTE Knowledge Sharing PartnersEBSCO, Index Copernicus, Ulrichs Periodicals Directory, JournalTOCS, PKP OpenArchives Harvester, Bielefeld Academic Search Engine, ElektronischeZeitschriftenbibliothek EZB, Open J-Gate, OCLC WorldCat, Universe DigtialLibrary , NewJour, Google Scholar